68184 DECEMBER 2011 ABOUT THE AUTHORS JULIAN LAMPIETTI works on Agriculture and Rural The Grain Chain: Food Security and Managing Development in the Middle East and North Africa Region of the World Bank. The focus of his current work Wheat Imports in Arab Countries program is on food security in Arab countries, climate change adaptation in agriculture, food supply chains, and public-private Arab countries depend heavily on imported food, particularly wheat. partnerships in marketing. Population growth, rising incomes, and climate change will only increase their DONALD F. LARSON works on rural development and natural resource policy in the Bank’s dependency on wheat imports, thereby making Arab countries even more Development Research Group. His research investigates the exposed to international market volatility. A recent World Bank study, “The determinants of agricultural growth and productivity; the workings of Grain Chain: Food Security and Managing Wheat Imports in Arab Countries,� food and commodity markets; the linkages between resource identifies key bottlenecks in the wheat-import supply chain (WISC) and some management and poverty; and the performance of markets derived possible remedies. Efficiency improvements to the supply chain can improve from climate change policy. MICHELLE BATTAT food security. This SmartLesson provides a summary of the relevant issues. is a consultant through the World Bank/FAO Cooperative Program. Her work focuses on improving food security and agricultural supply chains in the Middle East and North Africa. DANA EREKAT is a logistics strategy consultant with over 10 years of international development experience. She divides her time between the Middle East and North America. ARNOLD DE HARTOG has over 40 years of international management, consultancy, and engineering experience in materials handling, logistics, and port terminal development, in particular agri-bulk related. SEAN MICHAELS worked as an extended-term consultant on Agriculture and Rural Development in the Middle East and North Africa Region of the World Bank. His work largely focused on improving food security and agricultural supply chains. APPROVING MANAGER Hoonae Kim, Sector Manager, the World Bank Middle East and North Africa Sustainable Development Photo Credit: Michelle Battat Department. Background The recent food price shocks of 2007–08 and Arab countries are particularly vulnerable to 2010–11 have raised concerns about the increased volatility in international wheat affordability of key food staples, including markets since they rely heavily on wheat wheat. Population growth, income growth, imports, and short-term demand for wheat in promotion of biofuels, high and volatile fuel the Arab world is relatively inelastic. In total, prices, and depreciation of the US dollar all Arab countries import around 56 percent of contribute to upward pressure on wheat the cereal calories they consume, the largest prices; meanwhile, climate change, as seen share of which comes from wheat. Some through an increase in severe weather events, countries in the region import 100 percent of and low global stock-to-use ratios further their wheat consumption needs. contribute to increased price volatility. SMARTLESSONS — DECEMBER 2011 1 One approach to helping Arab countries reduce the cost of policy to improve food security. Not only can this provide feeding their citizens is to help reduce the cost of importing them with critical lead time to secure alternative wheat staple food supplies. To that effect, the objective of the supplies or supply routes during times of crisis, but reserves study “The Grain Chain: Food Security and Managing can also offer psychological benefits that may prevent Wheat Imports in Arab Countries� is to identify key hoarding and pilferage. bottlenecks in the wheat-import supply chain (WISC) in Arab countries and to explore ways in which those countries Moreover, historical data suggest a strong negative can mitigate import risks and thereby ensure sufficient correlation between changes in wheat stock-to-use ratios supply while reducing their fiscal liabilities. and changes in wheat prices. That is to say, when the level of available wheat stocks is high, the likelihood of a price The study identifies three critical aspects to the WISC and spike has generally been lower, and vice versa. Whereas examines various investments and strategies Arab countries safety nets like cash transfer programs promote the should consider if they want to reduce their exposure to purchase of wheat when prices are high, well-managed international market volatility and the total cost of strategic reserves encourage the purchase of wheat when importing wheat. prices are low and the release of stocks when prices are high. Therefore, increasing strategic wheat reserves can 1. Strategic reserves: Maintaining strategic wheat reserves reduce domestic price volatility and the frequency of with clearly defined decision rules can contribute to domestic price shocks. Releasing reserves also means a domestic and international price stabilization. greater supply available on the world wheat market, which mitigates international price risks. This finding is particularly 2. Logistics: Promoting investments throughout the supply noteworthy, because in helping themselves, Arab countries chain can create smooth logistics, improve security, provide can also help the world. a reliable supply of wheat, reduce the base cost of importing wheat, and reduce product losses. In terms of managing the reserves, three factors must be considered in establishing policy guidelines and decision 3. Procurement: Developing a procurement strategy that rules: the threshold domestic price that triggers the leverages strategic partnerships, maintaining a diversified drawdown of wheat reserves, the target reserve level, and portfolio of suppliers, and using commodity hedging the rate of reserves replenishment. The cost of a wheat strategies all help mitigate counterparty and price risks. reserve policy is dictated in large part by these three criteria. The lower the threshold price, the larger the size of the reserve, and the more aggressive the replenishment rate — the more costly the policy will be. As with any policy decision, the benefits of strategic wheat reserves must be measured against the cost of maintaining them and against the competing needs for the same funds.2 Lesson 2: Improvements to logistics can have significant cost savings. The logistics analysis assesses the efficiency and reliability of the supply chain from the unloading port to bulk storage at the flour mill. The study, using time and cost as two key measures of efficiency, found that the average WISC transit time in Arab countries is 78 days, costing around $40 per metric ton. For comparison, the average transit time and cost in the Netherlands are 18 days and $11 per metric ton; Photo Credit: Michelle Battat in South Korea, 47 days and $17 per metric ton. While there are significant differences in supply chain performance throughout the region, port logistics proved Lessons Learned to be an opportunity for improvement in most countries. On average, 29 percent of total WISC costs are incurred at Lesson 1: Increasing strategic reserves and drawing the port. Of these costs, 65 percent are driven by vessel them down based on clear decision rules can help turnaround time, which includes both waiting time in the mitigate both domestic and international price volatility. harbor and the time it takes to unload the wheat once the vessel is at the berth. Long turnaround times — in some The analysis suggests that existing storage capacity in the extreme cases, vessels wait in the harbor for more than 20 region as a whole averages the equivalent of six months of days before beginning to unload the wheat — have a consumption, and estimated ending stocks average four significant impact on the cost of importing wheat. Wheat and half months.1 However, many Arab countries are suppliers also consider port logistics when offering a bid planning to increase their strategic wheat reserves as a 2 For a more detailed discussion of the role of storage policy and food se- curity, please look for “Food security and storage in the Middle East and 1 Ending stocks for a given country are defined as beginning stocks plus North Africa� by Donald F. Larson, Julian Lampietti, Christophe Gouel, Carlo production and imports, minus exports and consumption. Cafiero, Brian D. Wright, and John Roberts, forthcoming. 2 SMARTLESSONS — DECEMBER 2011 price for wheat tenders. Therefore, efficiency improvements (Aqaba), may be able to reduce supply chain congestion by may reduce both logistics costs and the cost and freight importing some wheat through nearby Mediterranean (CFR) price of wheat. ports (Tartous in Syria, Tripoli and Beirut in Lebanon, or Haifa in Israel) and then trucking it to silos and mills in the While we observed that vessel turnaround time is a critical northern part of the country. Other countries may be able bottleneck in many countries throughout the region, the to take advantage of transshipment from large vessels at cause for such bottlenecks varies; causes include the capacity deep-water ports into smaller vessels serving shallow-water of unloading equipment, customs and inspections ports. Using this hub-and-spoke model would allow large procedures, priority rules for other vessels, and inclement volumes of wheat to be shipped to a single deep-water weather. If vessel waiting times could be reduced to one port in the region and then distributed to multiple day, Arab countries would save over $2.94 per metric ton, or destinations. Last, Arab countries could take advantage of $110 million per year. Waiting times could be reduced by a “parcel service� model. Specifically, smaller countries like expanding port handling and storage capacities, adding Qatar and Bahrain may be able to benefit from importing more berths that can handle grains, changing priority rules, wheat on shared vessels, and also carrying cargo for dredging the harbor to allow for larger vessels, harmonizing neighboring countries. phytosanitary procedures with the exporting countries, and reducing bureaucracy in customs procedures. It will be important for Arab countries to undertake further analysis of the specific causes of, and potential solutions to, bottlenecks at individual ports to help mitigate supply risks and ease pressures on wheat prices. Regardless of the cause of a bottleneck, all segments of the WISC are interconnected, and efficient and reliable logistics throughout the supply chain is critical to ensuring delivery of supplies in a timely and cost-effective manner. Efficiency improvements could help reduce the time it takes to import wheat, the base cost of importing wheat, and product loss — as high as 5 percent in some countries — thereby improving food security. Lesson 3: Strategic partnerships and hedging instruments would help reduce the risk of supply disruptions and price volatility. Across the Arab world, the team observed different approaches to issuing wheat tenders. Some countries take a more conservative approach by issuing tenders in a predictable fashion, which keeps a constant flow of wheat coming into the country and spreads price risk across all tenders. Other countries take a riskier approach, importing large volumes of wheat through a limited number of tenders. Jordan could also import wheat via nearby Mediterranean ports. Regardless of a country’s preferred method of wheat Source: Authors of “The Grain Chain: procurement, there are various methods and tools that can Food Security and Managing Wheat Imports,� 2011. enhance a country’s risk management strategy and thereby improve food security. Countries could develop strategic partnerships with grain traders and key grain-exporting Physical and financial hedging instruments could also be countries. This could take the form of a long-term contract employed to reduce exposure to price volatility and shocks. with a reliable grain trader who has access to global Some Arab countries are already using physical hedging markets, or a free-trade agreement (FTA) with a grain instruments, such as forward contracts, to lock in a price for exporter including a specific clause regarding the trade of wheat, but these tend to be on a short-term basis. These wheat, as is the case in the Morocco–U.S. FTA. These countries could benefit from issuing similar contracts over relationships would help reduce counterparty risk, which if a longer time horizon — locking in the volume and price of actualized and left unmitigated could lead to temporary wheat imports 18 to 24 months in advance of the delivery supply disruptions. of the wheat could help governments with budget planning. Cooperation among neighboring Arab countries may also ease the risk of supply disruptions. In some instances, there The use of financial hedging instruments for agricultural may be gains to be had by working with neighboring commodities, on the other hand, is not yet common countries to import wheat to the region. For example, a practice in the Arab world. Trading wheat futures and country such as Jordan, with only one port in the south options on an exchange is yet another strategy countries SMARTLESSONS — DECEMBER 2011 3 could employ to help mitigate the price risks they face. A successful hedging strategy would be over a long-term horizon, using a mix of the various instruments available, and could help governments better predict their future fiscal liabilities and thereby improve food security. Conclusion Of course, there is no silver bullet to mitigate wheat import risks. For instance, strategic reserves would not be effective if logistics systems fail to reliably deliver the wheat from storage to the flour mills or end consumer. At the same time, smooth logistics can keep base importing costs low and ensure timely delivery of supplies, but they do not provide a supply buffer during price shocks. Finally, without an effective procurement and hedging strategy, countries are constrained in terms of mitigating their exposure to price volatility. Therefore, a comprehensive approach that incorporates strategic reserves, supply chain logistics, and procurement strategies is critical to reducing import risks and will have the greatest impact on improving food security. Although the Arab world faces a unique set of constraints and risks, this study is relevant for countries in other regions as well. The holistic approach is applicable for any other grain-importing country seeking to manage its exposure to import risks. And the study is equally relevant for grain exporters. A key message in business is “know your customer.� Arab countries import the majority of their wheat from North America, Western Europe, the former Soviet Union, and Australia; these key grain exporters can better meet the needs of their customers by improving their understanding of the risks Arab wheat importers are facing. DISCLAIMER SmartLessons is an awards program to share lessons learned in development-oriented advisory services and investment operations. 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